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New York, California Muni Bonds Most Sought…Record High Muni Bond Supply…Wall Street Aligns Rate Cut Odds…Big Apple Finances Undeterred…New Capital Offer to PREPA…K-12 School Finances Decline…Will Hurricane Helene Impact Muni Credit…National Downgraded
New York, California Muni Bonds Most Sought…Muni bonds issued in high tax states such as New York and California are witnessing the greatest investor demand. New York State’s largest hospital system, Northwell Health, sold $1 billion tax-free bonds rated Moody’s ‘A3’ S&P ‘A-’ at a top tax-free yield of 4.23%. Columbia University sold ‘AAA’ rated taxable and tax-free bonds joining a bevy of colleges selling bonds to upgrade campuses or refinance. MTA sold high grade green bonds at a top tax-free yield of 3.47%. A California clean energy issuer rated Moody’s ‘A2’ sold long term bonds at 3.65% yield.
Record High Muni Bond Supply…September marked the ninth straight month of higher muni bond issuance. For six straight months, monthly muni bond issuance has exceeded $40 billion. September’s muni bond supply was 44% higher than a year ago. Both new money and refunding bond volume have increased. States and local governments borrowing needs have increased as pandemic aid has been exhausted. The continued trend of mega deals coming to market also increased supply. Mega muni bonds sold in September include $1.6 billion Washington D.C. general obligation bonds, $1.6 billion Texas water bonds, and $1.5 billion New York City Transitional Finance Authority bonds. Mega muni bond deals reflect growing demand for tax-free bonds.
Wall Street Aligns Expectations with Fed… Wall Street is adjusting its expectations in response to stronger-than-expected job growth in September. Bond markets assign 85% odds of a 25 basis point rate cut in November. JPMorgan Chase and Bank of America gave up their calls for a larger November rate cut, and are now forecasting a 25 basis point rate cut in November. The recalibration brings Wall Street more in sync with the Federal Reserve projections. Federal Reserve chair Jay Powell signaled that the US central bank would consider reverting to its more usual quarter-point cut in November if economic data remained robust. Powell said, Federal Open Market Committee was “not a committee that feels like it’s in a hurry to cut rates quickly”, but would rather move monetary policy “over time towards a more neutral stance.”
Big Apple Finances Undeterred…The management of roughly $95 billion New York City muni bonds, and the Big Apple are in the hands of experienced professionals that “operate independently of political winds,” NYC Comptroller Brad Lander assured that investors can be confident that NYC credit is strong. During times of historic challenges to New York City and the nation, the city continued to issue debt and pay debt service on time. Many city agency personnel have decades of experience in high-level positions across various administrations, which ensures a high degree of continuity in budgeting, finance, and debt administration. A half a dozen candidates including Lander are vying for the city’s top office as Mayor Eric Adams faces prosecution.
New Capital Offer to PREPA…Opposed to PREPA debt plan, Assured Guaranty, GoldenTree Asset Management, National Public Finance Guarantee Corp. and Syncora Guarantee have offered to invest fresh capital into PREPA. Bond parties opposed to PREPA debt plan seek only a reasonable settlement on PREPA’s bond debt, but the board has wasted hundreds of millions of dollars on lawyer and advisor fees “fighting an ill-conceived and unsuccessful war of attrition.” A 2023 settlement between BlackRock Financial Management, Nuveen Asset Management, Franklin Advisers, Whitebox Advisors, and Taconic Capital Advisors, who agreed to support the plan in exchange for higher recoveries, has been extended until October 2025. The First Circuit Court of Appeals is considering whether to rehear its June ruling which said that bond parties have a lien on the authority’s net revenues. K-12 School Finances Decline…K-12 schools’ financial conditions are changing. State funding is getting less generous, and is unlikely to replace the extraordinary federal pandemic aid. Schools received $190 billion in pandemic federal aid, all of which will be exhausted this year. Expanding school choice, falling birthrates, and immigration uncertainty has brought school enrollment challenges. At the same time, staffing costs have increased. To remain competitive and curb attrition, schools have raised teacher salaries. Schools will seek state aid increases and property tax hikes to avert a fiscal cliff. Favorably, K-12 school median reserves across the sector are materially higher than before the pandemic. Tighter operating conditions could pressure ratings of lower-rated K-12 schools.
Will Hurricane Helene Impact Muni Credit…FEMA and commercial insurers will likely cover a significant portion of reconstruction from Hurricane Helene, a category 4 storm that hit 91 counties in south-eastern United States. Airports, utility systems, hospitals, retirement communities and local governments in the path of the hurricane will likely suffer temporary financial disruption. Enterprises with strong cash positions are well positioned to cover repairs while FEMA and insurance reimbursement arrives. Large insurers are likely to foot the bill for properties ravaged by the hurricane. “We would expect to see some fluctuations in revenues and expenditures over the next year, which could impact debt service coverage,” a Moody’s analyst added, “I don’t expect any credit impact at this time, though we will continue to monitor all affected issuers.” The aftermath of one of the biggest Gulf Coast storms will require a massive governmental response and probably a lengthy recovery.
National Public Finance Guarantee Downgraded…Moody’s has downgraded the insurance financial strength rating of National Public Finance Guarantee Corporation (National) to ‘Baa3’ from ‘Baa2’. The outlook is stable. Although National’s insured portfolio has amortized significantly, over 10% of National’s insured exposure is below investment grade. Moreover, National withdrew $647 million of capital to pay dividends last year. Moody’s estimates National’s capital adequacy score remains in the ‘A’ category. The downgrade reflects weakening in National’s risk-adjusted capital adequacy.
Compare 30-Year taxable U.S. Treasury yield 4.28% to 30-Year tax-exempt Municipal Bond yield “AAA” 3.53% “AA” 3.92%; “A” 3.98%. For investors in the 35% tax bracket, a 3.5% tax-exempt yield is equivalent to a 5.38% taxable yield. Top-rated long-term tax-free bonds yield 82% of comparable taxable U.S. Treasuries.